Nanya Technology (TWSE:2408) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Nanya Technology Corporation (TWSE:2408) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Nanya Technology

How Much Debt Does Nanya Technology Carry?

As you can see below, at the end of September 2023, Nanya Technology had NT$12.8b of debt, up from none a year ago. Click the image for more detail. But it also has NT$60.5b in cash to offset that, meaning it has NT$47.7b net cash.

How Strong Is Nanya Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Nanya Technology had liabilities of NT$16.5b due within 12 months and liabilities of NT$5.47b due beyond that. On the other hand, it had cash of NT$60.5b and NT$7.95b worth of receivables due within a year. So it actually has NT$46.5b more liquid assets than total liabilities.

This surplus suggests that Nanya Technology is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Nanya Technology boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Nanya Technology's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Nanya Technology had a loss before interest and tax, and actually shrunk its revenue by 48%, to NT$30b. To be frank that doesn't bode well.

So How Risky Is Nanya Technology?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Nanya Technology lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through NT$24b of cash and made a loss of NT$7.4b. Given it only has net cash of NT$47.7b, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Nanya Technology is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.